Hmmmm....
Despite that fact, delinquencies have moved steadily higher with the 30 day + delinquency now reaching close to 50% of all outstanding Option Arms.
"I told you so!"
These loans were never designed to lead to actual home ownership.
They were sold as a means to "buy" a home, but the lenders knew full well that this could never, ever happen given the structure of the note.
These notes were more akin to a levered bet placed on commercial real estate, in that they were worse than the typical commercial "interest-only" loan in their inclusion of a requirement that values continually increase to stay ahead of the negative amortization.
These loans cannot be cured.
The typical OptionARM customer was qualified on the initial rate on the minimum payment, which was usually 2%, interest-only.
For a typical $500,000 California or Florida home, this resulted in a monthly payment requirement of roughly $850 (2% of $500,000 is $833 a month.)
The "real rate", however, on the loan was typically around 6 or 7%, and the rest of the principal and interest was "capitalized". If the amortizing rate was 6% on the note then the P&I for a "full payment" would be $2,982.83, resulting in about $2,100 a month in negative amortization.
If you try to "work these out" and manage to go "to the wall" on the note with a 40 year, 4% amortizing refinance, the note still comes up to $2,082.75 - more than a clean double of the original payment!
The "homeowner", however, can't afford the doubling of the payment. Further, the house isn't worth $500,000 any more - at best it is worth $300,000, which is a big part of why he stopped paying.
These notes were the worst sort of abuse and they're littering the landscape. I know people who have them here in Florida and have defaulted, and there are a scad load of them in California. My prediction originally was that half or more of them would wind up being worth recovery value at best, and this appears to be the case. Since these were nearly all written in the bubble areas, recovery will be fortunate to be 50% of face value.
How many of these are out there? Good question. I have seen numbers from $200 - $500 billion, all from reputable sources. Why don't we have an accurate number from the banks and Fed on these things?
In the "best case" this is another $50 billion in losses and about 25% of the homes purchased in bubble areas from 2003-2006. In the "worst case" this is well over another $100 billion in losses and perhaps as much as half of the homes purchased in those areas during the bubble years.
Either way you slice these losses have not been recognized or accounted for nor has their impact on home inventory and price.
This is interesting....
In mortgage foreclosure cases, the plaintiff has standing as the holder of the note and the mortgage. When MERS forecloses, MERS is the mortgagee and it is the holder of the note because a MERS officer will be in possession of the original note endorsed in blank, which makes MERS a holder of the bearer paper. MERS will not foreclose unless the note is endorsed in blank and held by MERS.
There's a key question as to whether those "assignments" by MERS are actually being performed by MERS, or whether they're effectively forgeries, as has been talked about before (e.g. it appears that the endorser is in fact an employee of the recipient of the note, not an officer of MERS), but we'll leave that one alone for now.
But....
The use of bearer bonds for avoiding taxation became more popular after World War I, and illegal activity involving bearer bonds continued over the following decades until various nefarious criminal activities involving bearer bonds resulted in the Tax Equity and Fiscal Responsibility Act of 1982, which outlawed any new issuance of bearer bonds in the United States.
Uh........
More specifically, for private bearer debt instruments:
The sanctions included disallowing the deduction of interest expense by issuers of bearer bonds and denying the holder of bear bonds the tax exemption for interest earned on the bonds. In addition, TEFRA imposed an excise tax equal to 1 percent of the principal amount of the debt multiplied by the number of years in the term of the bonds. These measures effectively ended the issuance of bearer debt instruments, and all debt securities are issued in registered form now.
Every such "endorsed" debt instrument that has been converted to bearer form by endorsement in blank appears, from this description, to have created an instant excise tax liability in the amount of 1% of the face value times the number of years in the term of the mortgage, and of course this excise tax as with all taxes must be declared and paid.
So exactly how is it, again, that MERS is in possession of Bearer Instruments, and is not the endorsement in blank of such an instrument by the originator (creating a bearer instrument) a prohibited act (unless the tax was declared and paid, and you know full well it wasn't) under Federal Law?
The IRS describes what is subject to tax:
Registration-Required Obligation - Section 4701 (b)(1) provides that the term "registration-required obligation" has the same meaning as when used in Section 163(f), except that such term shall not include any obligations required to be registered under section 149(a). Section 163(f) provides that the term “registered-required obligation” means any obligation (including any obligation issued by a government entity) other than an obligation which -
(i) is issued by a natural person,
(ii) is not of a type offered to the public,
(iii) has a maturity (at issue) of not more than 1 year, or
(iv) an obligation is issued where there are arrangements reasonably designed to ensure that such obligation will be sold (or resold in connection with the original issue) only to a person who is not a United States person, and
(v) in the case of an obligation not in registered form -
I. interest on such obligation is payable only outside the United States and its possessions, and
II. on the face of such obligation there is a statement that any United States person who holds such obligation will be subject to limitations under the United States income tax laws. (Internal Revenue Code Section 163(f) (2)).
Obligation - The term “obligation” includes bonds, debentures, notes, certificates, and other evidence of indebtedness regardless of how denominated. (Treasury Regulation §46.4701-1(b)(2))
Hmmmmm..... let's see, mortgages are "obligations" that are evidence of indebtedness, the mortgages in question were not issued by natural persons (they were issued by banks and other lending institutions), they all (or nearly all) have a maturity of more than one year, and they are in fact traded publicly.
Oh my... I wonder how much in uncollected taxes could potentially be due here? Is anyone at the IRS paying attention? 
How to give an economics writer a coronary:
Recommend something that has been done twice before, and both times led to disaster, including being a major contributor to The Great Depression.
Well guess what: JP Morgan and the other banks are doing exactly that.
Oct. 13 (Bloomberg) -- Banks will push the Obama administration to expand its mortgage-modification program to allow interest-only periods on reworked loans, seeking to bring more homeowners into the initiative while recognizing concern that it may only postpone defaults, according to JPMorgan Chase & Co.
MAY?
Can I remind people of history?
Prior to the depression of the 1920s, there was a mortgage loan product used by many of the American people, known as the interest only loan. Why did this long disappear? And why has it suddenly reappeared? Let’s take a moment to answer each question, and hopefully provide some food for thought.
During the 1920s and into the early 30s, many of the citizenry of this country chose to live above their means. They chose the interest only loan because it allowed them to purchase a larger home for less money. What happened when the stock market crashed and jobs were scarce, and there was no income? Many of these people were left without homes; as they had chosen to simply pay the interest on their mortgage there was no equity built into their homeownership. When no equity builds, and the income ceases, the bank forecloses and residents are forced from their homes.
If our government allows this it will guarantee a GREATER DEPRESSION. Whether it comes now or in a few years, it will happen. This is the precise same stupidity that led to the 1930s and it will have the exact same outcome this time.
Here's the problem folks, in one sentence:
The banks are STILL insolvent.
They are sitting on over a trillion of dollars of this paper (about $1.1 trillion to be exact) and several hundred billion is severely impaired or even worthless. Wells Fargo, just as one example, has (as of its last 10Q) $106 billion of second lines outstanding on balance sheet, and God only knows how much in SPVs (Wells is known to have significant off-sheet exposure "inherited" from Wachovia.) Let me put this in perspective for everyone.
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Essentially all of the first mortgage loans written in California and Florida after 2003 are underwater. Even in parts of the state (such as my area of Florida) that have been "relatively" untouched (compared to, for example, Naples) homes are below 2003 prices. In "bubble" areas prices have in many cases returned to levels such that anything purchased before 1995 or thereabouts is underwater. In some parts of SW Florida you can buy a home that sold for $500,000 for $50-75,000, cash, right now. Those are 1970s and early 1980s prices. While that is an extreme example the most bubbled areas are the ones with the greatest over-representation of paper from Wells (and ex-Wachovia), JP Morgan/Chase (ex-WaMu) and Bank America (ex-Countrywide.)
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Many of the homes in these areas, especially in Florida, that have undergone this sort of collapse in price have a literal negative value. That's because the former owner has departed and the power was shut off for non-payment; the banks have constructively abandoned these homes. In Florida if you do this within a reasonably short period of time mold will become established inside the sheetrock. Once that happens the home must be gutted to the studs or razed, and the cost of doing so exceeds the value of the bare lot. Then there are the delinquent property taxes, frequently in arrears for two years or more at this point. Many people have said that "oh there's a decent recovery" on all this paper. No, in many cases, there is is in fact no recovery at all, and that's a fact.
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In essentially every case a 2nd Line (HELOC or "Silent Second") behind a first in Florida and California taken out since 2003 is worthless if the primary note goes into foreclosure. That's because such a second is a subordinate lien and entitled to nothing until the first is fully satisfied. But the first can't be fully satisfied as the home's value is less than the first line's balance. As a consequence these loans are worth zero - literal zero. Wells may have as much as $25 billion of this worthless paper on balance sheet all on its own and Bank America may have as much as $30-50 billion. (Pinning down the exact amounts is impossible as the companies do not disclose geographic concentration metrics necessary to do so.) It is not unreasonable to believe that $200 billion in junior lien losses are being hidden - right here and now - which is sufficient to detonate these institutions even without the primary mortgage losses being counted!
This is the truth behind the housing mess and our government and banking regulators are engaged in an active cover-up to prevent recognition of the truth. Banks were given the ability to do other than "mark to market" earlier this year, and they have roundly abused this privilege to hold both first and second lines at ridiculously above market value. But Treasury is also interfering with contract law in an attempt to "protect" bank balance sheets. How? By violating lien priority - again - exactly as they did with Chrysler and GM.
The Truth is that there has been no material completion of these "modifications" promised under HAMP:
Only “a couple thousand” conversions have been completed, Maggiano said. To aid the process, the government last week streamlined documentation requirements, and granted borrowers and loan servicers on initial trials an extra two months to complete the work, which typically must be finished after three months of timely payments, she said.
"Streamlined documentation requirements" = You can lie about income and assets. Again. Once again, fully-documented underwriting is not being required, all in the name of preventing the truth from being recognized - the banks are insolvent as they are holding hundreds of billions of dollars of worthless trash, almost assuredly $100 billion or more of it in second lines alone, at or near 100 cents on the dollar.
An unresolved piece of the administration’s program, she said, remains a plan to have second-mortgage owners rework that debt whenever first mortgages are changed, an initiative that U.S. officials said would likely be in effect by June when outlining it in April.
Again, we're back to the basic problem:
If you recognize these losses the second lien holders all blow up. If you roll the second into the first mortgage then the property is so far underwater that not only is the mortgage unaffordable but there is no reason for anyone to take the deal. If you force first lienholders to take damage that the second should take then you destroy the securitization market for mortgages as you force losses on people that should be protected from them under black-letter law.
In any event there are plenty of detonated (and actively hidden) first mortgages that have blown up too, and we've not even talked about commercial real estate exposure yet.
On the document changes:
To help move more borrowers out of trials, the Treasury last week dropped a need for them to provide tax returns, Maggiano said. Servicers instead will be able collect documents allowing information to be pulled directly from the Internal Revenue Service, a process it’s trying to enhance with new forms and processes, she said.
Uh huh. That was done during the housing boom too. It was known as a 4506-T and was a routine part of even "Stated Income" loans. However the verification wasn't done, which is why we had tens if not hundreds of thousands of WalMart employees buying $500,000 houses while making $30,000 a year - on an OptionARM mortgage that was guaranteed to detonate in their face a few years down the road.
Other document changes mainly involve creating more “customer-friendly” layouts, Schwartz said. The changes aren’t similar to the “stated-income” lending popular during the housing boom that later created high defaults, she said; pay and employment information still is verified.
Riiight. If pay and employment information is verified what's difficult about it? Is it too much to ask for a current pay stub? Who (that is actually employed) doesn't have a new one every couple of weeks? Nobody I know!
All these new "proposals" are doing is attempting to once again screw the American public, turning them (once again!) into debtors and renters while lying to them about being a "homeowner." In addition if the original mortgage was a purchase money first an effective refinance into an interest-only product will destroy the non-recourse nature of the note in those states where it applies, leading those who are trapped in these loans a couple of years from now to lose not only their house but everything else they possess.
Yes, I know, JP Morgan reported "good" earnings this morning. If their earnings are so strong, and the franchise so healthy, why are they arguing for "interest only" exploding mortgages as a modification tool?
There is one and only one way to solve the housing crisis that will actually work, as I have said now for more than two and a half years:
Withdraw the fraud and lies, allowing home prices to contract to sustainable levels so that ordinary Americans can actually afford to buy a home with 20% down and a maximum 36% "back end" or DTI ratio.
At the same time force the banks to recognize the bad paper they are carrying - both on firsts and seconds. If this detonates them then so be it. There are banks who are not insolvent and those who were not and are not fraudsters deserve to prosper in a capitalist system for doing the right thing, not be punished for failing to engage in fraud as is now the case.
Those who are displaced by their homes will indeed be foreclosed upon, but in a year or two after rebuilding their credit they will be able to buy the same house back (or one similar to it) at a price that represents no more than three times their income with a sustainable, 20% down fixed-rate mortgage.
THAT is how we solve this crisis; those banks and the Mortgage Bankers Association who continue to demand that bogus and unsustainable lending be shoved down the American people's throat must be run out of Washington DC on a rail, AFTER being waterboarded as a consequence of demonstrating to the world their own particular brand of financial terrorism.
The American people have HAD IT with the lies and theft.
IT IS TIME TO TAKE THIS NATION BACK FROM THESE SCAMMERS.
We got a little problem here.....
A progress report released last week by the Treasury Department showed that only 11 percent (about 95,000) of Bank of America's delinquent borrowers who were potentially eligible for the program had been given a loan modification. That compares with 27 percent, or 117,000, for J.P. Morgan Chase, and 33 percent, or 68,000, at Citigroup, the Treasury reported. The figure for Saxon Mortgage Services, which is owned by Morgan Stanley, is 41 percent, or 32,000.
There are too many conflicting currents here, which is what will ultimately doom this program, as has doomed all the previous ones.
First among them is the simple question: How many of these people who allegedly "qualify" for a modification will wind up with a sustainable mortgage if they get one?
This is a key question, yet one that hasn't been asked in public, nor have there been public answers tendered. The truth is pretty ugly - without significant principal forgiveness (not "forbearance") a huge, perhaps even majority percentage of these loans are not sustainable even if modified.
The problem is simply that on any reasonable set of assumptions the income of the household does not support the principal balance. "HAMP" calls for modifications to reduce principal and interest for all outstanding mortgage liens (firsts and seconds, if any) to 31%.
Here's the "waterfall" process, as shown by MGIC (one of the mortgage insurers who has been hammered severely by this mess)
The problem here is that several of these steps don't do much. If you "capitalize" arrears all you're doing is adding them to the principal balance of the loan. This "cures" the instant default but does nothing to solve the underlying problem that caused it in the first place (unaffordable payments.)
Reducing the interest rate helps only if the owner started with a "reasonable" rate up front. If their original loan was an "OptionARM" with a teaser, and they qualified on that teaser, they're unlikely to get to sustainable payments even with a reduced interest rate.
The third step, extending terms, does little as well. A $200,000 loan @ 5% over 30 years has a P&I of $1,069.19. The same loan over 40 years (the maximum extension) has a P&I of $960.39. $100 matters (it's about a 10% payment reduction) but if the difference of $100 makes it possible for you to pay then you're still one unscheduled calamity (e.g. your car needs a new alternator) away from being delinquent again.
The fourth step, "forbearing" principal, is not principal forgiveness. It is simply deferment, turning your note into what amounts to a balloon. This last step is particularly nasty for homeowners in that it will preclude you from being able to move for a decade or more, making it impossible for the workforce to follow job opportunities, as you would have to pay off the balloon in order to sell the house.
Then you have attitude:
Even as the administration urges lenders to do more to help homeowners, some Bank of America employees continue to express skepticism about whether all of those seeking assistance really need it. "There's a difference between hardship and entitlement," said Jerry Durham, Bank of America's vice president of home retention.
Oh really? Let us remember that Bank of America "acquired" Countrywide Financial, the king of making unsustainable and outrageously risky loans that were pushed like a drug junkie shoves his smack under the nose of debt addicts. Never mind that Bank of America seemed to think it was "entitled" to tens of billions of taxpayer dollars. Now the bank suddenly thinks that other people being "entitled" is such a bad thing? Who set the example?
The article also cites a disturbing trend:
On a recent morning, Tiffany Palmer was on the line with a frustrated borrower looking for help with his mortgage. He was $6,000 behind in his payments.
"Do you have a 401(k) or savings -- liquid assets that can be quickly converted into cash?" she asked him. He was going to have to come up with money for the mortgage. Because his monthly mortgage payments represented less than 31 percent of his income, he made too much to qualify for a modified mortgage under the federal initiative. "You will not be eligible for the program," she said.
This sort of "advice" should be barred under Federal Law and result in criminal sanction, especially for banks that have received taxpayer funds (of which BAC is particularly exposed.) Why? Because 401k and IRA money is protected in the event of a bankruptcy, with few exceptions. As such it is outrageously irresponsible to suggest that a debtor in trouble liquidate retirement accounts to come current, especially when nothing is being done to make the loan sustainable in the long term. Better to file bankruptcy and shove that loan up the bank's behind!
Never mind this sort of advice:
Could she skip her credit card payments, about $400 a month?
Oh, so that's nice - screw someone else so we get ours? Uh huh.
The conflicts of interest here are huge:
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The banks have "Servicing Rights" (or MSRs) that require them as servicers to advance principal and interest payments to the noteholders. There are several risks involved in such an enterprise, of course, including the risk that the debtor won't pay at all, but in addition there is "prepayment" risk - that is, anything that causes the loan to terminate early (short sale, refinance, etc) decreases the value of that loan to the bank holding the servicing rights. These "MSRs" were "written up" in a major way in the first and second quarters. Was that a fantasy? Probably.
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Forbearance, interest rate reductions and similar games sound good but they decrease cash flow. Remember that the ultimate holders of these notes through securitization have to agree. When this is Fannie or Freddie this simply forces their heads further underwater, but when it is someone else they have no mandate to agree to take less than they contracted for. In most cases securitization documents permit some small percentage of modifications without investor approval (e.g. 5% of the loans in the pool) but once that threshold is crossed the story changes.
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In addition, and perhaps most importantly, a loan that is modified but which re-defaults is one where the investor made a good faith change (reducing his or her cash flow) believing that it was cheaper than prosecuting a foreclosure, but then wound up with both the lower cash flow and the foreclosure! This is perhaps the most serious problem and unlike the others it is not really a conflict of interest, it is simply the expression of the fact that in nearly all cases the first loss you can take and clear your board is the best loss; the more screwing around you do the worse things are.
The bottom line is that there is no evidence that HAMP is working or can, and the Congressional Oversight Panel has seen through the ruse:
The Panel found, "The result for many homeowners could be that foreclosure is delayed, not avoided." HAMP modifications are often not permanent: For many homeowners, payments will rise after five years, and although the program is still in its early stages, only a very small proportion of trial modifications have converted into longer term modifications. The Panel is also concerned about homeowners who face negative equity or are "underwater" - that is, the value of the loan exceeds the value of their home. For many borrowers, HAMP modifications increase negative equity, a factor that appears to be associated with increased rates of re-default.
Yep.
At the time I said that these efforts would fail as there is no actual solution other than forcing those who made bad loans to eat them. HAMP, and all other programs like it, are inherently just another gimmick promulgated upon the public by our government - another form of "extend and pretend", that when boiled down to its essence is legally-sanctioned accounting fraud.
The solution to unaffordable mortgages, as I have repeatedly noted, is foreclosure and a forcing downward of housing prices whether Congress and The Administration want to admit it or not. Affordable housing requires not gimmicks but houses that are inexpensive enough for people to be able to purchase and afford on an ongoing basis. We're not there, despite the crooning of The National Association of Realtors and other associated pressure groups.
This is directly contrary to the stated policy of Congress as expressed by Barney Frank, who has said that making bad loans on purpose is A POLICY to prevent home prices from contracting to long-term sustainable values.
In other words the bankers and Realtors have effectively bought Congress and goaded them into keeping home prices unaffordable for the average American. Refusing to reverse course on this policy will guarantee that sustainable economic growth will not return to America.
We will not and cannot, mathematically, exit this crisis until the bad debt is flushed from the system. This same sort of gimmickry and game-playing was attempted in the 1930s and was directly responsible for The Depression extending for a decade, ending only when World War II began.
You would think that we would have learned from this history lesson that all the game-playing in the world will not solve a debt problem, nor will shifting debt from one hand to another (e.g. to the federal government) lead to a sustainable economic recovery.
Those institutions that made bad, unsustainable loans must be forced to recognize their losses, even if it results in business failure. Only through contraction of these asset prices to sustainable levels where people can afford to purchase them on an ongoing basis given the actual employment prospects that exist (including the consequence of offshoring all our call centers and most of our manufacturing!) will we exit this crisis.
Housing prices must come down significantly - very significantly - from here. This will bankrupt many lenders who made unsustainable loans and that must be not only allowed to occur but encouraged so as to result in truly sustainable home ownership.
An environment of excessive debt, fostered by the improper and ridiculously negligent and intentional acts of both Congress and The Federal Reserve, cannot be resolved with more debt, any more than you can solve a drunk's problems by handing him another bottle of whiskey.
Dick Durbin is once again flapping his gums instead of actually addressing problems:
The legislation, introduced today by Senator Jack Reed of Rhode Island, would require lenders to evaluate all borrowers for affordable loan modifications before initiating foreclosure. It would also require banks to offer and approve a loan modification if the restructured mortgage returns more money, the so-called net-present value, to investors than would foreclosure.
The proposal would establish new penalties and would let borrowers overturn foreclosures if lenders fail to comply. It would also place new limits on fees charged in foreclosure.
The reason we have this crap going on is quite simple, and fixing it is also quite simple:
Banks are holding homes back and foreclosing when they should be modifying as a direct consequence of the policies and actions of the government.
As just one example the "loss share" agreement made with the buyers of IndyMac has set up a perverse incentive system where the usual incentives to modify loans have been intentionally and wantonly destroyed.
If you remember this was the deal announced:
As part of the deal, the FDIC entered into a loss-sharing agreement with IMB HoldCo. IndyMac will assume the first 20 percent of losses on a portfolio of "qualifying loans," after which the FDIC will assume 80 percent on the next 10 percent of losses, and 95 percent on losses thereafter.
Ok, so we have a maximum loss that the investors (which include George Soros and Michael Dell, by the way) can take which is:
20% + 2% (80% of 10%) + 3.5% or about 25% of the total is theirs - but note that "theirs" is all at the top - once you get into the "meat" of the losses only 5% of whatever is left is theirs.
Here's the problem: As part of the deal they also get to write down the portfolio as of the date of the deal. They took that, taking roughly a 25% mark against the assets at purchase (in other words, they bought $20.7 billion of assets at a discount of $4.7 billion)
Now here's the issue - in a deteriorating market the incentive to modify a loan exists only when the loss on a foreclosure will be materially higher than the loss on a modification.
But if someone "else" (like THE TAXPAYER) will eat (almost all, in this case, essentially 95% of) the loss, then your incentives shift - in a big way.
See, if you modify, you stop earning "fees" on the delinquent note. You can't charge late fees any more, you can't charge "special servicing costs" and similar types of things that you can (and do) get to add to a delinquent note that is "headed for foreclosure." These are all immediate cash - and they're all yours, never mind that if just 1 in 10 of these notes "cures" (after you hound the living hell out of them to pay somehow by hook or crook) you win huge since you got to buy at a 25% discount up front!
These "incentives" to NOT modify are usually outweighed by the much higher loss you'd take if you foreclose.
BUT THESE FOLKS ARE PROTECTED BY THE "LOSS SHARE" AGAINST ANY MATERIAL AMOUNT OF LOSS (95% IS EATEN BY SOMEONE OTHER THAN THEM!)
So now the incentives are wildly tilted toward them telling borrowers to go stuff it up their backside, and they are.
These "loss share" deals are a big, big problem.
It gets worse.
Regulators are refusing to force a mark-to-market on this paper. We continue to see banks fail where the FDIC reports 20, 30, 40, up to nearly 50% losses, with some sector-specific losses of 60%! Colonial, again, had a 39% realized loss against their balance sheet claimed values when BB&T came in and purchased them.
The argument for permitting cost-basis (or other forms of "mark to mythology") accounting is that the market price is in fact "not real."
That's a nice fantasy put forward by the banking industry and lobby but we now have nearly 100 bank failures under our belt and in fact the market price seems to be about where these things wind up - putting the lie to any claim that market prices are "too pessimistic." Indeed I have yet to find one instance of a failed institution where balance sheet values ended up being too pessimistic once the regulators came in and started selling things off.
Such "extend and pretend" games, in addition to the ridiculously false view this presents of a financial institution's balance sheet effectively precludes either modification or foreclosure and resale of the property, because either of those events "finalizes" any embedded and hidden loss and thus forces a mark to be taken. That could be a wee problem if the bank or other institution doesn't have sufficient capital to absorb these losses, never mind the hit to so-called "earnings" even if they do have the money.
The reason banks are not modifying loans in good faith and are playing these games is because the regulators AND LAWMAKERS are PERMITTING THEM TO LIE and HIDE losses.
Then, in compounding the error they are entering into "loss share" deals where there is NO INCENTIVE to modify because on a strict financial analysis IT IS MORE PROFITABLE TO "PURSUE FORECLOSURE" since the loss differential IS NOT THEIRS while the fees they can earn from NOT modifying ARE!
Finally, adding insult to injury you have the impact on local and state governments - these properties are not paying property taxes either, being in arrears in some cases by as much as two years. Yes, this will eventually be recovered via tax certificate sales but the state and local governments deserve to get paid NOW - not five years down the road, when the cause of the delay and non-payment is intentional game-playing by regulators and banks.
Folks, this is really simple: If you want to see those modifications that make sense get done, including but not limited to principal forgiveness where it makes sense, and foreclosures to be prosecuted and properties resold at the market, thereby clearing it, you need to do the following:
In short if you want modifications that make sense to happen you have to stop making it profitable for banks to play games with the accounting so that they are forced to recognize losses as they are realized in the market rather than hiding them in the hope that they will magically "self-cure" (when the data says that is a statistical impossibility.)
You must also get rid of the perverse incentives that make it more profitable for the corporate raiders - who have been given a "no lose" proposition in their acquisition prices - to foreclose instead of making sustainable modifications.
As for the States, I have a solution there too - and perhaps that's where we should focus our ire, since we can't seem to get anyone's attention in Washington DC given all the bribed, er, "lobbied" lawmakers
Change state tax certificate laws. Sell off delinquent taxes in the fall following the delinquency (assuming a spring "due date") thereby putting the certificate in someone's hands six months after non-payment and shorten the allowed redemption ("cure") period to 12 months - after which the certificate holder can pay the delinquent taxes in full and gain a clear title. This will put an immediate stop to banks refusing to foreclose or dispose of delinquent properties, leaving them vacant (since they will wind up losing them to a tax sale) and it will stop the bleeding at the state revenue level. As a beneficial side effect it will force a clearing of the market and re-establish occupancy, maintenance and upkeep of these homes.
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